2/37th Limitation as it Applies to Trust/Estates

Heads up for 2026 returns:  the new 2/37^th limitation can reduce non-misc itemized deductions for estates and non-grantor trusts once you’re in the top tax bracket.

For trusts/estates that means once you’re in the 37% bracket (taxable income over ~ $16,000).

The reduction = 2/37 x the lesser of:

1.      Total otherwise allowable itemized deductions, or

2.      Taxable income (before itemized deductions) that exceeds $16,000

Translation:  if you are in excess of the top bracket, your deductions are not worth 37 cents on the dollar, but more like 35 cents on the dollar.

This appears to be an unintended consequence to the trust world, but don’t hold your breath on Congress fixing the issue anytime soon.